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macroeconomics has started impacting all our daily lives along with our you know the entire investing ecosystem like never before so you are the authority in micro Global macroeconomics it will be very good to know your thoughts and the topic of today's discussion is The New Normal so before we come to New Normal I'd like to understand from you how has the global market all asset classes got disrupted the war what are the factors because of which the big disruption has happened um well I think it's a of course a very important question I think that rather than in a new normal I feel we're living in a new abnormal those things that were normal before are not normal anymore you know when Kobe did of course there was a Southern panic and there was a crash of us and Global Equity that lasted for a few weeks until us Europe and many other countries in massive amounts of monetary fiscal and credit easing but then what happened was that there was a rally in financial markets because there was a reopening of the economy and this massive monetary fiscal and credit stimulus but we kept loose monitor fiscal and credit policy too much for too long and we created initially asset inflation and then we created you know Goods inflation and was a bit of a everything bubble where since the policy rates were either zero or negative long-term interest rates went back to zero if not negative you had the literally 18 trillion dollar equivalent of public debt between Europe and Japan that then not in negative nominal yield up to maturity of 10 years in some Scandinavian country even mortgages had a negative nominal yields so public Equity is U.S and Global went through the roof private Equity evaluations when through the roof of course anything that was a tax stock growth stock VC even firms that had a very flimsy business model had a boom because with zero policy rates long duration assets get a rally and then you had a bunch of speculative bubbles in assets that were worth nothing you're the Sparks bubble you're the crypto Bible you had a Mimi stock bubble bundles were low credit spreads were low in spite of high debt ratios and the party of course went crashing last year because we had finally Goods inflation that forced central banks to increase interest rates and a traditional investment advice is to try to balance your portfolio 60 40 60 equities and 40 safe bonds or 70 30 or variance of it like Bridgewater's respiratory they're just variants of the same thing but the idea of doing 60 and 40 based on The View that historically there is a negative correlation between the price of bonds and the price of equities when equities do well like when there is a risk on or economic growth their price goes High volumes go higher the price of bonds Falls so you make money on the equity lag and you lose money on the bottleneck when there is a risk of a recession Equity go down but then bond yields fall and the price of bonds goes higher so you make money on the 40 percent but that assumes that inflation is low and stable when like last year inflation starts to rise Equity to poorly because the discount factor for those equities are long-term interest rates is much higher and long duration assets like tax stocks or roads or VC do even more poorly because the long duration assets are more sensitive to Rising long-term interest rates and that's why the NASDAQ last year fell 30 while the s p fell only 15 but the bonds actually do pulley as well because bone yields going from less than one percent in U.S 10-year treasury to three and a half implied that the price of the bond fell 20 so you lost more money on your unquote safe bonds then you lost money on the S P 500 so last year there was nowhere to hide you lost money on public equities you lost money on Tax growth VC stocks you lost money on private Equity if you truly Market into markets you lost the crashing 80 90 done for Mimi crypto and all the other specific debuggable like Sparks you lost money on bonds you lost money on credit because credit's friends wide and of course even cash gave you a negative real return because of inflation so I think the lesson the investor learned is that when inflation starts to rise the negative core information within bonds and equities become positive but positive in the wrong direction meaning both of them goes out and that's something that people have to start to wear and find Investments that can provide you a hedge against inflation in the basement of fiat currency they exist but they're not the traditional ones Dr rubini you make a point that in this new normal in this change in macroeconomic environment inflation is likely to remain higher for longer yeah and interest rates Also may be sticky and may not come down in a hurry and the growth is likely to remain anemic in this kind of an environment many of the investors who are listening to you right now what would your advice be for Equity as an asset class high growth equities or you know value investing if the environment remains so for next few years what kind of asset classes do you think would do well well you know if I'm right actually you don't have to be apocalyptic I'm not expecting hyperinflation advanced economies I'm not even expecting double-digit inflation let's assume that the average inflation rate say in advance economy is not two but it's only six percent and given all the factors that are on the demanded supply side I think the new normal for inflation is going to be six percent that doesn't seems like a lot but if inflation is six then 10-year treasury yields have to be at least eight percent six for inflation and two percent real because when inflation is high in volatile the inflation restraint has to be positive and high enough now with eight percent ten year treasury yields then high yield and high grade bonds that have spread over treasuries have to be at least double digits mortgage rates have to be double digits and of course anything more risky than that is going to be High double digits and so on last year when deals in the US went from less than one percent to three and a half bonds lost 20 percent if they had to go from three and a half to eight percent they would lose another 50 percent and equities with a bond yield at eight percent will have to be valued much less in the 1980s by 82 when we had high inflation and bunions were much higher the price earning ratio for S P 500 firms was seven today is still 17.
so in that scenario even of a moderate inflation will be a bloodbath for equities will be a blood blood for boundary bloodbath even for high growing stocks like tech stocks like it happened last year now what's a hedge against inflation if you have to worry you have to start to put your portfolio in your portfolio assets to do well if inflation is higher I would say number one I would put money into inflation index bonds that give you a higher return When infection is higher two if you go for short-term treasuries as opposed to long duration treasuries as inflation goes higher the year don't say on a one month female goes higher but you don't have the price loss that you have on a tenure the price loss is smaller and the yield is much higher so on fixed income you have to be there two I think that you have to be overweight in gold and some of the precious metals not only because they're a good hedge against inflation and the basement of fiat currency but we also live in a world where there are political and geopolitical risks the political instability that might lead to people wanting to have safe houses like gold and geopolitically as the US is weaponizing the dollar the Strategic Rivals of the us whether it's China or Russia Iran or Korea and others will have to go into an asset they cannot be seized now dollar can be seized but also Uranian and pound and Swiss franc can be seized as we learn in Russia so which is the only International store of value not a currency is a store of value that cannot be seized by say us or Europe if there is a geopolitical conflict is gold of course gold in the vault in Beijing or Moscow not the gold in the balls of the New York fed or the bank of England or somewhere in London so I think that gold is a good hedge against inflation against the basement of fiat currency against political and geopolitical risk against even financial crisis because in the financial crisis sometimes your money in the bank might not be safe so you want to be overweight gold you want to be overweight by the way some of the green metals because in a world of a green transition where it's quite expensive to produce zinc Cobalt and all sorts of green Metals the price of them is going to be higher so you want to be there and finally among real assets some forms of real estate real estate is how to say resilient to climate change you don't want to be having real estate commercial service sector that is mostly labor cost inflation is plateaued but it's not going to fall to two percent and therefore stopping as soon as the RBI or the fed or ECB were thinking until a couple of months ago is not going to be possible the FED will have to go towards six percent if there are things about inflation this if he's gonna have to go towards four percent the RBI may have to do another 25 25 hikes two or three of them rather than stopping the way they stopped in February so if that were to happen then you'll have a further correction of evaluations and with a Slowdown of the economy and if I'm right there is still a meaningful chance of a harder Landing rather than a softer Landing the combination of a harder Landing higher policy rates is going to imply that the last two months where where there was a market rally for equities for credit for bonds and so on those those positive sentiments might be dashed in further correction of risky asset myocard this year so that this year may look a little like last year as opposed to be one in which uh asset prices are doing well this year you know a quick quick question on Commodities India is one of the largest users of imported commodity and commodity price rise impacts our corporate balance sheets as well as our day-to-day lives because we use imported fuel what are your thoughts on Commodities in general the pricing in the next coming years in this kind of environment which macro environment we are talking about um well commodity process spiked last year following the Russia and invasion of Ukraine Energy prices both natural gas and oil Industrial Metals food fertilizers in part because of the impact of the of that war but those commodity prices were already high even before you know brand was a hundred dollar per barrel because we have under invested in fossil fuels the production of renewable is rising but not fast enough and even without this demand commodity price were high food prices were high because in many parts of the world because of a global climate change we have desertification we have lack of water we have droughts and that was spiking say food prices even before the Russian division of Ukraine led to a shock to fertilizer prices and food prices so if I'm looking at the structural factors I think that there is a super cycling commodity is going to continue it's going to continue because one the geopolitical risks are all implying how I recommod devices unfortunately this ugly Russian invasion of Ukraine is going to get nastier it's going to be a more brutal World War this year and therefore that's an upside to energy and to Industrial Metal secondly there's a meaningful chance in my view that this year Israel will have to strike Iran because Iran is becoming a threshold nuclear state if that were to happen you'll have a shock to Energy prices in the Gulf because there'll be disrupts of the supply three if China is now going to grow five percent per year as opposed to this this year as opposed to two three percent the demand for commodity is gonna rise that's gonna fuel commodity prices so you have all these factors and there's been massive amounts of under investment into Commodities in fossil fuels because we've been bashing rightly so big oil and saying shareholders stakeholders don't Finance don't invest into more fossil fuels that's it but even high prices of industrial metal and green metal have not led to massive new investments in them in Copper in zinc in Cobalt and you name it because there are all sorts of regulatory restrictions to doing so it takes years until you find the new minds you make the investment and finally get the stuff out of the ground so between the demand and the supply side I think that this year you could have a spike in commodity prices Goldman Sachs wrote a report the beginning of the year saying that the entire commodity is Factor Not Just Energy this year could High go higher by 43 percent that's huge but if it was only 30 percent or 25 percent headline inflation will be higher core inflation will be higher and all come out the importers whether in advance economies or Emerging Markets will have another terms of trade shock like they wanted last year so that's one of the upside risk to inflation downside risk to economic growth that increases the probability of a hard Landing this year all right Dr rubini thank you very much for sharing your thoughts on the global landscape right now and how you know your observation will help us to manage our portfolios and our strategy better thank you so much for your time today
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